We used to have fun commenting about the bond market, including Treasuries, Mortgages, Municipals, and Corporates. But that was before the dark times. Before deleveraging.
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Monday, November 27, 2006

The Dow is getting hammered today and I think that's what's keeping the bond market above water. The 10-year was down 10 ticks earlier today on reports that the weekend sales were strong, but with the Dow down 160, bond have rallied and are now +5 ticks on the day. That's a 1/2 point turnaround.

Interesting that the bond market has performed so well the last two trading days given the dollar sell off. If inflation is defined as a decline in purchasing power, then a weaker dollar is synonymous with higher inflation. This is particularly true in the U.S., where such a large percentage of consumer goods are imported. Weaker dollar means the price of imported goods goes up.

A more technical way to look at a dollar sell-off is that storing capital in U.S. dollars has become less attractive. So for example if foreign interest rates are higher than U.S. rates, then investors may choose to invest overseas and enjoy the greater carry. Of course, if this were happening, then we'd still expect the bond market to decline, which isn't happening.

One realistic possibility is that investors are pulling money out of the U.S. stock market and investing it overseas. This seems plausible given the sharp sell-off in U.S. stocks today. But if that were happening, I'd expect European stocks to ourperform the U.S. over the last few days. That's not happening either. The FTSE, the CAC, and the DAX are all underperforming the DJIA since Wednesday. The Nikkei is a little better, but it isn't the yen that's been driving this recent move, its been the euro.

Anyway, I think there will be better entry points in the near future. I'm holding any cash I have until I see 4.65% on the 10-year.

About Me

I oversee taxable bond trading for a small investment management firm. Opinions expressed on this website may not reflect the opinions of my employers. Strategies described here should not be taken as advice, and may not be the strategies being used for my clients. Take this website as the egotistical ramblings of a bond geek and nothing more. E-mail is accruedint *at* gmail.com or find on Facebook.